In the past few years, India has grappled with what economists call a ‘Twin Balance Sheet’ (TBS) problem, a term coined by the former chief economic advisor to the Government of India, Arvind Subramanian. The TBS problem refers to the concurrent stress on the balance sheets of banks, due to non-performing assets (NPAs), and over-leveraged corporate firms, reflecting their inability to pay back loans. This complex issue has impeded India’s economic growth and led to a banking sector crisis. As we delve into the current scenario, the fundamental question remains – is India’s TBS problem over?
As of 2023, there is evidence to suggest that the problem is far from over but there have been considerable strides in managing and reducing the magnitude of the issue. The first step in this direction has been the recognition of the problem. The Reserve Bank of India (RBI) and the government have taken steps to clean up the balance sheets of public sector banks through mechanisms like asset quality reviews, stringent NPA recognition norms, and the Insolvency and Bankruptcy Code (IBC).
Since its introduction in 2016, the IBC has shown promising results in resolving the stressed assets issue. The process has led to significant recoveries and facilitated the restructuring of distressed companies. Yet, the problem persists as resolution under IBC has been slower than anticipated due to legal challenges and the Covid-19 pandemic’s impact.
Banks, for their part, have made concerted efforts to strengthen their balance sheets, reflected in their reduction in NPAs and provisioning for bad loans. However, the NPA issue continues to plague the banking sector, with newer sectors like MSMEs and retail now showing signs of stress, thereby underlining the pervasive and evolving nature of the TBS problem.
On the corporate side, deleveraging has been observed, as many firms have sold assets to reduce debt. However, the high leverage problem is far from over. Corporate profitability has been hit hard by the pandemic, slowing down the process of balance sheet repair.
In conclusion, while efforts towards resolving India’s TBS problem are well underway, it would be premature to say that the problem is entirely over. Both banking sector reform and corporate deleveraging are works in progress. As India navigates its economic recovery, addressing the TBS issue will continue to be critical to the stability and resilience of the financial system. The road to recovery is long, and the journey, while laden with hurdles, holds promise for a stronger and more robust economic framework.
